Bloomberg News

Putin’s Second Coming Is No Gift to Russia or Investors: View

September 29, 2011

Sept. 30 (Bloomberg) -- When Vladimir Putin first came to power nearly 12 years ago, the most optimistic -- if tortured -- argument in his favor was that he would become a Russian version of Chile’s Augusto Pinochet, bringing economic renewal in return for a firm grip on power.

As Putin embarks on another 12 years of ruling Russia, that hopeful argument is more tortured than ever. Russia’s future looks less like that of Chile, and more like that of Egypt or Tunisia.

By stepping aside to make way for Putin, President Dmitry Medvedev finally dispensed with the pretense that the two leaders were somehow competing for the hearts and minds of Russians. Much like the Soviet Union before it, the country is ruled by a monolithic elite that is increasingly devoted to sustaining its own power.

To some extent, the ruling elite -- aided by high oil prices -- has delivered prosperity. Over the past decade, the Micex index of Russian stocks has gained more than 700 percent. The size of the economy has doubled as viewed through purchasing power, according to the International Monetary Fund.

Too much of the wealth, though, has accrued to corrupt officials, and too little to people who actually work for a living. Russian entrepreneurs face crushing bribery and kickback costs. In state-controlled companies, money disappears literally by the billions. In Transparency International’s most recent corruption perceptions index, Russia ranks worse than Libya. No wonder 53 percent of Russian entrepreneurs, according to a poll published in the newspaper Novaya Gazeta, say they want to leave the country for good.

Pursuit of Power

Now, the pursuit of power is trumping even the prudent management of Russia’s economy. Putin’s decision to back Medvedev in a spat with Alexei Kudrin, the long-serving and well-respected finance minister who resigned this week, is merely a symptom of a deep and widespread illness. The ever- increasing spending required to support the Putin regime’s popularity is becoming less and less sustainable for a government that depends on the oil and gas sectors for nearly half its revenue.

Thanks to added expenditures on defense, state-worker pay and pensions, Russia will require an oil price of about $105 a barrel to balance its 2012 budget, up from only $55 back in 2007, Russian brokerage Troika-Dialog estimates. Meanwhile, a reserve fund Russia created to cushion the budget in lean times contains only about $27 billion, down from roughly $140 billion in late 2008. That’s not enough to last even six months in a serious crisis.

Institutions Needed

As long as the current regime rolls on, the institutions needed to address the country’s problems, and to promote genuine, sustainable economic growth, have little chance of taking root. Courts cannot make impartial decisions, because the elite’s power depends in part on its ability to influence them. Investors cannot have reliable and predictable rules, because the elite must reserve the right to break them if necessary.

If and when Russians get fed up, they will run straight into the biggest institutional flaw of all: the lack of a mechanism for the peaceful transfer of power. Not since Boris Yeltsin anointed Putin on New Year’s Eve in 1999 has the country had a truly free and fair election. As a result, it’s hard to imagine how the Putin regime can end in anything other than messy, and perhaps violent, instability.

Judging from the performance of the Russian stock market, which has risen about 6 percent so far this week, investors see Putin’s return to the presidency as a comforting continuation of the status quo. Ultimately, the status quo is precisely what they should fear.

--Editors: Mark Whitehouse, David Shipley

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To contact the Bloomberg View editorial board: view@bloomberg.net.


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